ImmunoGen (NASDAQ:IMGN) is a biotech full of huge potential profit for investors. Management has slapped a peak annual sales estimate of $1 billion or more on key drug candidate mirvetuximab soravtansine. Assuming a reasonably typical biotech valuation of one to five times peak sales, if all goes well, ImmunoGen could be worth as much as $5 billion (which would represent a more than 1,500% gain from its recent prices).
Yet the stock is down over 75% year to date. Management has bet the farm on mirvetuximab's big phase 3 FORWARD I trial in ovarian cancer on a pretty thin phase 1 dataset. Speaking of management, CEO Mark Enyedy is still quite new, having joined ImmunoGen in May of this year.
These are good reasons to be nervous about ImmunoGen. But they aren't the reason why I won't buy. That problem is simpler, and far more devastating: timing.
We likely won't know if management's bet on mirvetuximab has panned out until after they're forced to issue a significant number of new shares, thus substantially diluting current shareholders.
The timing issue, in two quotes
On the most recent quarterly earnings call, CFO David Johnston noted, "We're going to be managing expenses to enable this cash balance to last for two years" (this and other quotes courtesy of S&P Market Intelligence). Chief Development Officer Charles Morris later explained that ImmunoGen expects to have FORWARD I data "in '19" -- three years from now.
So even if management is able to control cash burn -- by no means a certainty, given that it will have to ramp up spending to shell out for the FORWARD I trial -- the cash won't last long enough for us to see data on ImmunoGen's most advanced pipeline candidate and main value driver.
There are catalysts coming sooner...
There are other catalysts ImmunoGen shareholders can look forward to between now and 2018, when the money runs out and dilution (likely) becomes necessary. Mirvetuximab is being tested in combination with a number of other cancer drugs (most notably Roche's Avastin and Merck's Keytruda) in a phase 1b/2 trial called FORWARD II -- a trial which is expected to begin reading out in the first half of 2017. IMGN779, which is in phase 1 for acute myeloid leukemia, should report clinical data in 2017, as well. Management expects to announce another partner program that will begin registration testing later in 2016, which I'm hoping will come with a slug of cash -- and some additional milestone opportunities for ImmunoGen to stretch that cash runway out a little further.
The key problem, though, is that these catalysts don't answer the big question: Will Mirvetuximab work as a monotherapy? And this is the big question because frankly everything else in their pipeline is either years away from approval (a pair of drugs in phase 2, and IMGN779 in phase 1) or is a partnered compound with significantly less profit potential for ImmunoGen.
...and the math looks brutal
Let's assume for the moment that ImmunoGen recovers from its recent lows (likely based on positive FORWARD II data) and is able to raise cash at a more favorable valuation while it waits for mirvetuximab's FORWARD I data to mature. If we assume that management is able to stretch the current $245 million in cash for two years, then it only seems fair to assume that management will need to raise at least another $120 million to make it for the third year until mirvetuximab reports out FORWARD I data in 2019. If ImmunoGen were at double today's market cap (which would be a gaudy jump indeed, based on early/mid-stage data for mirvetuximab as a combo therapy), the company would have to issue shares equivalent to around 25% of its market cap to get enough cash to limp to the phase 3 trial's finish line.
But wait, there's more.
Once the trial reports out, expect more dilution -- because the $120 million I mentioned was only to get ImmunoGen to the data readout. In the worst-case scenario (data readout is bad, management scraps mirvetuximab, is unable to see a way forward with its broader pipeline), ImmunoGen could end up bankrupt.
And in the event of a positive data readout, ImmunoGen needs to raise more cash -- cash to keep the lights on while the company waits months for potential FDA approval. Cash for likely post-marketing studies, if the FDA approves mirvetuximab. Cash to hire a sales and marketing force, assuming ImmunoGen continues in its stated plan to go it alone in selling mirvetuximab.
ImmunoGen also has sold $100 million in debt that can be converted to shares any time between now and June 30, 2021. And if the stock's price pops with a bunch of good news, that's exactly what will happen, adding another layer of dilution to current shareholders.
Picking clinical-stage biotech winners is tough, but with a company facing an issue of this magnitude, the choice for me is easy. I'm staying far away, and I think you'd be well served by doing the same.